Bank of Japan keeps interest rates unchanged

IlyaGarger

HONG KONG (MarketWatch) -- Japan's policy of keeping interest rates at 0% will remain intact for now after a key central bank panel voted unanimously Friday against a change in stance.

"'The BOJ will encourage the uncollateralized overnight call rate to remain at effectively zero percent," the central bank said in a statement.

At a press conference Friday afternoon, Bank of Japan Governor Toshihiko Fukui gave no indication of when rates might rise.

"We did not specifically discuss the end to zero interest rates at this policy meeting," he said. "We have no preset idea on the specific timing for exiting zero interest rates."

Fukui indicated earlier this year that the policy was coming to an end, but he has declined to set a timetable for tightening rates.

Causing more of a stir on Friday were comments by Chief Cabinet Secretary Shinzo Abe, who called on the BOJ to refrain from a policy tightening.

"We want them to work together with the government to make sure we depart from deflation," Abe said. "We want them to support the economy sufficiently from the monetary policy side by keeping rates zero."

Following Abe's comments, the yen fell to as low as 111.80 against the dollar, a nearly 1% drop from its morning level. See foreign exchange rates.

"When Abe's comment came out, they sparked quite a lot of dollar buying against the yen," said Craig Chan, a currency strategist at the Royal Bank of Scotland in Hong Kong.

"The market's priced in some policy tightening, so the comment raises the risk of some correction. If you look at year-end yen futures, they've got about 0.7% priced in," he said.

The rate policy dates back to the late 1990s. It was introduced in order to encourage capital investment and stem deflation, and has been largely successful, say analysts. See more global markets coverage.

"The key reason deflation has eased for the past two years is that the zero-rate policy has brought about economic recovery," said Naoki Murakami, senior economist at Goldman Sachs in Tokyo.

He predicts rates will start to rise this summer.

"We think that the BOJ will start to hike rates in the July-September quarter, after confirming that recovery trends continue," said Murakami. "Basically our story is that the BOJ will hike rates twice by 25 points this year. The first time will be in August, and the second will be in December."

Friday morning, the government announced that the economy grew at an annualized rate of 1.9% in the first quarter, marking the fifth straight quarter of expansion and raising expectations that interest rates could soon rise. See full story.

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